Many homeowners in this market who have to sell their homes are doing short sales. A short sale means that the homeowner owes more on his property than the current market value of the property .A homeowner can attempt to negotiate that the bank takes less than the full loan balance at the close of escrow, after the home is sold. A short sale can be a better solution than foreclosure or bankruptcy in terms of credit, dignity and business ethics. Of course, there are situations where this is not a possible solution.
Some borrowers are choosing this route rather than foreclosing on their property, based on adverse market conditions. There are credit ramifications to both of these situations, but, with a short sale, the owner is taking control of the situation, and the credit ramifications tend to be less radical. Some borrowers can no longer keep their mortgage payments up. Others, may need to sell their home for various reasons or need to re-locate. If their home’s value is “upside-down”, a short sale may be the best option.
Since there can also be tax ramifications to a short sale, it’s best to get advice from a tax advisor, and possibly, even a real estate attorney. If a short sale process is pursued, then a real estate agent will also be needed to guide the borrower through the process.
Qualifications to negotiate a short sale with the bank typically fall under the category of ‘financial hardship’. This could include loss of income, or just a general inability to make mortgage payments based on the borrower’s financial picture. The process of getting this approval may be laborious.
Patience is required to get to the right contact within the bank. The borrower can expect to submit extensive paperwork including a ‘hardship letter’, bank statements, income and asset information, etc. The bank may want to see that the borrower is basically insolvent or without liquid assets to pay down the mortgage.
The real estate agent can help determine sales price based on a comparable market analysis. Many Realtors are dealing with short sales now, and understand the process. They can construct the Purchase Agreement to sell your home. The bank will likely want a copy of this also.
It’s important to remember that the IRS may pursue the difference between the debt owed and the debt paid as income. Also, the lender could pursue the borrower for the amount ‘forgiven’. That’s why it’s important to consult with professionals for advice on this type of transaction.
Criteria to purchase a home again after a short sale has occured depend on whether the new purchase is done with a conventional or government loan. Requirements may address the borrower’s payment history within the last 12 months prior to the short sale, or the period of years since the short sale occured.